Why sell side investors select to short outperforming firms when they know they are betting against growth firms expected to announce extraordinarily positive game changing news?
Gilead (GILD) has been the target of an extraordinarily well-crafted negative campaign, which started prior to its HCV drug Sovaldi’s approval in December 2013.
In the first quarter of 2014, Sovaldi sales revenues were $2.27 billion. The sales scored an unprecedented drug penetration in the history of therapeutics. They exceeded the most optimistic analysts expectations. Gilead’s revenues for the quarter reached $5 billion, up 98% from the year-earlier quarter. Product sales more than doubled to around $4.87 billion. U.S. product sales were around $3.63 billion up 159%. Net income for the quarter was $2.23 billion, up from $722.2 million of the same period last year, and earnings per share (EPS) were $1.48, more than triple its $0.48 in Q1 2013. Consensus estimate of analysts polled by Thomson Reuters were $0.91.
Is this good news?
It is great news for everybody except the stock market assessors. The question blowing like raging winds inside investors’ minds is: How great the news must reach before negative investors consider it great? How high the news must fly before negative analysts stop perpetrating negative stories? What can Gilead do more to enable the gullible develop immunity against unreasonable negative stories that frighten them into throwing away their most precious investment vehicles?
As they are usually aware of everything that relates to tomorrow’s market, negative pundits knew Gilead was on the brink of announcing unprecedented huge sales of Sovaldi. Nonetheless, their determination to bring GILD down never faded. They are doing whatever it takes to dilute the good news with antibody drug conjugates whose loads constitute plenty of negative fiction tales. Let’s look at what happened since Sovaldi's approval.
1. The Competition
The negative campaigns began with attempts to deflate analysts’ enthusiastic projections about Sovaldi’s sales revenues. They magnified the impact of the competing HCV drugs, insinuating that the moment these products reach the market, Sovaldi’s sales will take a dive. The truth is that Sovaldi’s efficacy has been demonstrated through various trials and so has been its safety. It is important noting that the unprecedented drug revenues in Q1 2014 from Sovaldi sales have been generated with the Sovaldi combined with old drugs, including ribavirin and the injectable alpha interferon. The combination Sovaldi/ledipasvir, which is expected to offer the gourmet beef had no role in the huge Sovaldi's Q1 revenues. It is expected to reach the market in Q4 2014.
Clinical trial data demonstrate that seventy percent of patients with genotype 1-HCV infection and with recurrent HCV infection following liver transplantation who received up to 24 weeks of therapy with Sovaldi plus RBV achieved sustained viral response (SVR12). There were no deaths, graft losses or episodes of organ rejection among post-liver transplantation patients, and no drug-drug interactions were reported between Sovaldi and immunosuppressive agents.
Another compassionate access study evaluated Sovaldi therapy among 104 post-transplant patients with severe recurrent HCV, including fibrosing cholestatic hepatitis, who had exhausted all other treatment options and received pre-approval access to Sovaldi via the compassionate use program. The results were striking in this category of patients who are historically among the most difficult to cure with many having no appropriate treatment options. These results had never been heard of anywhere before.
The FDA assigned Sioaldi/ledipasvir combination a breakthrough therapy designation.
Most analysts and experts believe that Gilead HCV combination will capture 50%-60% of the large market as they believe it has broader application than other competing products.
Another story: INDIA!
While the competition story continued to fill the media, another story is being narrated about a possible abstention of India from validating Sovaldi’s patent, allowing Indian companies to develop and sell a generic version of Sovaldi. Among the headlines: “Nothing in Sovaldi’s chemistry is new to deserve patenting!”, “Tahir Amin's group, an activist organization of lawyers and scientists has formally opposed granting a patent for Sovaldi in India”. Why? Because the drug uses "old science!" and “does not deserve patent protection!”
Since when drugs that do not deserve patent protection deserve FDA breakthrough assignment?
Of course Gilead declined to comment on the India story. People are not ignorant to the fact that Gilead and other American drug makers offer their costly life saving innovative drugs to many countries around the globe at bargain prices, India included. Gilead has already offered Egypt a 99 percent discount to Sovaldi’s U.S. price. We also heard that Gilead is already in negotiation with Indian drug makers to manufacture Sovaldi at a low price.
Investors must note that $2.1 billion out of the $2.27 billion of Sovaldi’s revenues in the first quarter came from U.S. sales. These sales are of Sovaldi in combination with either one of the two old drugs., It is not difficult to imagine how much larger revenues could be generated from the use of Gilead’s all-oral combination expected to hit the market in the third, quarter or the beginning of the fourth quarter 2014.
In a research report, Credit Suisse estimated Gilead's hepatitis C drug revenues would hit $13.2 billion in 2017. "In our view, Gilead data remains impressive, and the simplicity of their regimen will enable it to be the dominant one in the space," wrote Credit Suisse analyst Ravi Mehrota.
As the Negative Campaign Goes on …
As the campaign against Gilead continues, a new negative story surfaced: Sovaldi’s unacceptable high price.
The questions here become: Is Sovaldi’s the only high priced drug on the market? What about the drugs priced at over $100,000 and over $200, 000 and are required to be given repeatedly, especially for recurrent cancers? What about Vertex’ hepatitis C drug Incivek, which was priced at over $100,000?
Why now? Why Gilead? What would this political self-serving campaign accomplish? Will the government get involved in pricing of drugs? Could the whole campaign be political as usual?
Seriousness, like the truth, does not have versions. A serious approach towards the high cost of treatment demands reviewing all the leading causes contributing to the exorbitant costs. It is no secret that many causes and various organizations are behind the problem. They include government agencies, insurance companies, drug companies and other companies involved in drug distribution, price negotiation and other businesses related to marketing of the drug. All contributing factors should be reviewed and all drug-related firms must be interviewed, not only Gilead.
The problem has become chronic with nothing done towards solving it in a pragmatic way. Many analysts consider Sovaldi a solution rather than a cause for the deeply entrenched chronic progressive problem. They expect it to save millions of dollars for the government and the insurance companies by sparing them years of spending on preventive treatments that do not prevent the progression of the damaged liver; frequent hospitalizations; harsh complications of hepatic cirrhosis; liver transplant operations and on expensive treatments to prevent transplant rejection. This, in addition to the futile treatments of liver cancer and the frequent hospitalization the patients require each time their pain flairs up and the hepatic cancer complications become intolerable, life-threatening and require invasive procedures.
The online Wall Street Journal quoted RBC Capital stating, “Gilead pricing concerns are just “headline noise.”
Oppenheimer analyst Dr. Boris Peaker wrote among others, “Since competing drugs are priced at similar levels as Sovaldi, Congress would have to lower the drugs' prices through legislation, which is the unfulfilled dream since long and is unlikely to occur,”
Back To Real Business ….
GILEAD THE GIANT
The strategy Gilead executed over the past few years for upgrading its pipeline and strengthening its fundamentals is breathtaking.
In the past three years, Gilead strategy was directed towards investing billions of dollars buying firms and breakthrough drugs in order to boost its growth and double its revenues, income and value. Gilead has an excellent track record. It contributed the lion share in towards the miracle of turning HIV/AIDS from a torturing killer into a chronic disease. Now, the firm is offering HCV infected patients a cure that spares them years of suffering a life-threatening progressive liver damage that is life
Gilead’s strategy of acquiring companies with interesting technologies and promising products succeeded in transforming it into a full-fledged biopharmaceutical company. The firm’s pipeline has become impressive, promises short- and long-term growth. Gilead’s acquisition of CGI brought superior kinase inhibitors aiming at validated targets including those that inhibit spleen tyrosine kinase (Syk) for B-cell-related cancers and inflammatory diseases. The acquisition of Arresto Biosciences’ brought in a superior monoclonal antibody simtuzumab that targets and inhibits LOXL2 in the extracellular matrix. The drug is for fibrotic diseases and cancer. Fibrotic diseases comprise idiopathic pulmonary fibrosis (IPF) and myelofibrosis and the targeted malignancies included colorectal cancer and pancreatic cancer.
The drug has also been tested for liver cirrhosis, including non-alcoholic liver cirrhosis. This is the same fibrotic disease Intercept (ICPT) claimed one of its drugs has met its clinical trial endpoints, leading to its stock unprecedented rally. Indeed, Gilead’s pipeline includes a treatment that might be as good as the Incept’s product in reversing non-alcoholic liver cirrhosis.
Acquisition of Pharmasset brought in Sovaldi and the acquisition of another firm brought in the cancer drug idelalisib, which is already waiting to be approved for chronic lymphocytic leukemia and mantle cell lymphoma.
Idelalisib selectively inhibits the “delta” variation of the PI3 kinase molecular target, which is involved in tumor growth and proliferation. Impressive clinical trial data led the independent committee to halt the clinical trials and announce the drug has met all the endpoints required for approval. Gilead filed NDA for both chronic lymphocytic leukemia and for advanced resistant mantle cell lymphoma and much more …
Giliad management is doing what should be done to meet its ambitious goals of becoming a first class diversified drug design and development company. For years now the firm has been growing its revenues, income and EPS.
Bottom line: The expansion of Gilead’s technologies and pipeline products, the approvals of Sovaldi and the upcoming approval of Sovaldi/ledipasvir combination and of the cancer drug idelalisib are all reasons for buying, or accumulating the stock, which is worth $100 – a target we believe will be soon reached.
That’s what motivated us to accumulate GILD at any sign of inexplicable weakness.
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